Santander's UK profits plunge 40%

A Santander bank. 'The fact the share price rose on such a dismal set of results says a lot,' said one analyst. Photograph: Clive Gee/PA

Santander admitted on Tuesday that it was hoarding the cash it had borrowed from the European Central Bank rather than granting new loans to customers as it revealed that profits had fallen sharply as a result of troubled property loans.

In the UK, where the Spanish bank owns Abbey National, Alliance & Leicester and part of Bradford & Bingley, profits were down 40% to just under £1bn. A flotation of the UK business, already severely delayed, now appears to be more than a year away as it grapples with an economy that is growing much slower than it had expected.

The bank, whose home country is on the brink of recession after contracting for the first time in two years in the final quarter of last year, reckons the UK economy will now grow by 0.6% in 2012, a cut in its original forecast for growth this year of 1.6%.

Provisions for bad loans of €3.2bn (£2.65bn) dominated the results of the bank, which is the biggest in the eurozone, and knocked profits 35% lower to €5.35bn. Even without the spin-off of the UK business, Santander has managed to raise the €15bn that European banking regulators had demanded it find to shore up its financial position for any worsening of the eurozone crisis.

Alfredo Sáenz, Santander's chief executive, said that the funds it had obtained from the ECB through its special liquidity operations had not been lent to customers. The bank was holding on to it as a "buffer", he said, which might disappoint the authorities who had been hoping the funds would be lent to individuals and small businesses.

Of the €3.2bn of provisions, some €1.8bn was intended to allow the bank to write-off up to 50% of the losses on repossessed properties compared with 31% a year ago. In total, the bank has €32bn of loans to the Spanish property sector which was booming before the 2008 banking crisis.

"The numbers have been greeted with relief that the bank is beginning to account for losses properly and insert a degree of realism in its figures," said Louise Cooper, markets analyst at BGC Partners.

"The fact that the share price actually rose on such a dismal set of results says a lot. Fears of massive bank writedowns and losses are still high in investor minds, so some acknowledgement of the problem helps sentiment. The new Spanish government wants its banks to clean up their loan books and take proper losses on real estate, so expect other Spanish banks to follow. The government also wants the banks to improve their capital positions without needing money from the taxpayer," she added.

In the UK, the contribution to the group was knocked by a £538m provision for mis-selling of payment protection insurance. As it warned the outlook for 2012 would be "challenging", the bank stressed it had met its targets under the Project Merlin deal with the government, lending £4.3bn compared with the £4bn required. Santander did not sign up to the provision on bonuses last year, which require payouts to be lower and the disclosure of the five highest paid staff.